By James Hamilton, J.D., LL.M.
Describing the high concentration of audit services in the Big Four accounting firms as barely tenable, FSA Chief Executive John Tiner still disfavors a cap on auditor liability. Rather, he applauded the UK approach to auditor liability that enables auditors to take advantage of proportionate liability. Proportionate liability has at least two advantages over liability caps, he said. First, it avoids the possibility that auditors would suffer unlimited claims in a disproportionate manner for events which were not totally in their control. Second, in the interest of fairness, auditors are still liable for any claims arising from their negligence. Mr. Tiner, the former head of CESRfin, is one of the most thoughtful regulators on the planet. He delivered his remarks at a recent IOSCO conference.
Noting that a failure of a Big Four firm is not inevitable, the chief executive suggested three ways in which the audit firms themselves could ensure they are taking sufficient action to mitigate the risks of such a failure occurring.
First, he said that the audit firms should review and continually assess their internal processes for ensuring that the quality of audit work meets regulatory standards, as well as the firm's internal standards. Second, audit firm operating structures must be examined. Third, audit firms should put in place effective governance and oversight of their global business activities.
Turning to a recent white paper presenting the vision of six international audit firms, which he dubbed the Big 4+2, the FSA chief expressed surprise that the paper underplayed concerns about audit concentration in the Big Four. From his perspective as a European securities regulator there is a great concern about audit market concentration. Re-badging the Big Four as the Big Six for the presentation of the report was not enough to assuage his concerns. For example, he noted that EU regulators are concerned about the impact on market confidence if one of the Big Four firms was forced to withdraw from the market.